Rising compliance costs, hard to understand corporate client structures, fines and penalties, a shift from corporate responsibility to individual liability, and reputational concerns have led many US Financial Institutions (“FI”) to de-risk or end customer relationships as along with the offering of certain banking products. The consequential correspondent account closures result in “bank-less” customers, suffering economies and movement towards “non-transparent cash economies”.
Characteristics the FI De-risking Thumbprint
- Closing or refusing to open a bank account for an Individual or an Entity
- Restricting the Individual or the Entity from access to financial services
- Withdrawing or restricting banking services with money transfer organizations
- Cutting off correspondent banking relationships to Foreign Financial Institutions which in turn would not be able to access the international payments clearing system.
The AML Act of 2020 (the Act”) addresses the De-risking Challenge.
The Act states that the term ‘‘de-risking’’ means actions taken by a financial institution to terminate, fail to initiate, or restrict a business relationship with a customer, or a category of customers, rather than manage the risk associated with that relationship consistent with risk-based supervisory or regulatory requirements, due to drivers such as profitability, reputational risk, lower risk appetites of banks, regulatory burdens or unclear expectations, and sanctions regimes. Moreover, the financial exclusion caused by de-risking can ultimately drive money into less transparent, shadow channels through the carrying of cash or use of unlicensed or unregistered money service remitters, thus reducing transparency and traceability, which are critical for financial integrity, and can increase the risk of money falling into the wrong hands.
Government Accountability Office (GAO) to Perform a De-risking Analysis
The Act states that no later than 1 year after the date of its enactment, the Comptroller General of the United States shall conduct an analysis and submit to Congress a report on financial services de-risking that will:
- rely substantially on information obtained through prior de-risking analyses conducted by the Comptroller General of the United States
- consider the many drivers of de-risking as identified by the Financial Action Task Force, including profitability, reputational risk, lower risk appetites of banks, regulatory burdens and unclear expectations, and sanctions regimes
- identify options for financial institutions handling transactions or accounts for high-risk categories of clients and for minimizing the negative effects of anti-money laundering and countering the financing of terrorism requirements on such individuals and entities and on certain high-risk geographic jurisdictions, without compromising the effectiveness of Federal anti-money laundering and countering the financing of terrorism requirements.
Upon the completion of the Act’s required review, the Secretary of the Treasury in consultation with Federal functional regulators, State bank supervisors, State credit union supervisors, and appropriate public- and private-sector stakeholders, shall develop a strategy to reduce de-risking and its related adverse consequences.
De-risking is Complex.
Small countries dependent on correspondent banking relationships and remittance payments have been primarily identified as de-risking targets. Latin America and Caribbean regions have been perceived by USFIs as areas of unacceptable risk for Money Laundering (ML) and Financing of Terrorism (FT) compliance. Furthermore, the low volumes of transactions that are generated do not compensate the FI’s for a low margin/profitability associated with these relationships. The result is that small FFIs, Individuals and Entities in the region have been pushed to a less regulated or “shadow banking” system of non-existent regulatory oversight. Perhaps a reduction of costs of maintaining correspondent banking relationships while implementing technical solutions to improve efficiency of due diligence processes could support normalizing banking relationships (or lack thereof) of all affected by de-risking. In the meantime, at least there is a stated strategy by the U.S. Government for minimizing the effects de-risking.